Denel 2010/11 Annual Report and Financial Statements

Meeting report

Opening Statement
The Chairperson welcomed the delegation from Denel and their new chairperson, Mr Zoli Kunene. He congratulated Mr Kunene on his appointment and wished him well.

He informed the Committee that he had to meet with the Deputy Speaker at some point during the meeting and would have to leave. Dr G Koornhof (ANC) would take over the chairing responsibilities.

Denel briefing on 2010/11 Annual Report
Mr Kunene thanked the Committee for giving Denel the opportunity to present its Annual Report. He reminded the Committee that Denel's key mandate was to provide strategic defence technology and capabilities to the South African National Defence Force (SANDF) on a commercially viable basis. He believed that Denel had to further explore the way in which it balances its strategic commitments for the future of the SANDF and national security, with expectations that the entity had to be profitable. Denel was receiving international marketing opportunities, but were acutely aware of the challenges that they were faced with. This endeavour would take a lot of time and money, as well as continued support from the government.

In the past year, Denel spent more than R800m on Research and Development (R&D). This could be added to the amounts spent on R&D by Denel's associated companies, which added up to over R1.1bn. Denel's employees included approximately 400 specialist engineers and scientists. Overall, Denel sustained over 30 000 jobs in South Africa, and provides training and support to over 5500 school learners and university students on aircraft maintenance, including aviatics, mechanical and electronic works. Denel also encouraged the training of highly skilled engineers, technicians and artisans. Technology and products designed for military applications were now delivering benefits in civilian markets.

Denel was proud to say that it recently achieved a level 3 Broad Based Black Economic Empowerment (BBBEE) status following an internal and external verification process. Denel was proud of its contribution to the country's broader goals of empowerment, skills development and job creation.

Mr Talib Sadik, Group Chief Executive: Denel, informed the Committee that Denel's products were actively offered to the SANDF, and the entity was active in approximately 50 countries all over the world. Denel was active in over 30 countries in the African continent alone, and is also a key supplier to the United Nations. All the products were manufactured by 13 entities within the Denel Group, which employs approximately 6400 direct employees. Of the 10 additional Denel offices outside South Africa, seven are based on the African continent. The 13 entities were classified into four industrial clusters:
•Defence – Denel Integrated Systems Solutions, Denel Aviation and DPS, Turbomeca Africa, PMP, Denel Dynamics Missiles, and Rheinmetall Denel Munition
•Security – Mechem, Denel Dynamics UAV's, and Carl Zeiss Optronics
Certification  and Training – Denel Technical Academy and OTB
•Aero-structures – Denel SAAB Aerostructures (DSA)

57% of Denel's revenue came from local sources and the rest was from international exports. This increased from last year's 53%. Denel achieved most of the objectives identified in the shareholders compact. Over the past year, Denel has not disposed of any of the key capabilities required by the Department of defence and Military Veterans (DDMV).Access to the local markets was also maximised, as Denel depended on the local market for the bulk of its revenue. Denel achieved over 90% of its contracted milestones from the DDMV. 

Denel's investment in R&D spoke to its strategy for promoting the advanced manufacturing goals of the country. The entity spent over R1.1bn on R&D projects over the past year. In terms of profitability management, although Denel showed a profit for the financial year for the first time in ten years of R111m, the amount was affected by certain once-off items. However, Denel's defence, security and certification clusters were no longer depended on government funding. The Aero-structures cluster was still loss-making. Denel's debt was sitting at R1.85bn, which was quite high and posed a significant threat to the entity's growth prospects. Discussions were being held with government currently and the entity was looking at ways to strengthen its balance sheet. For the first time in ten years, Denel has generated a positive cash flow of R178m within the broader Denel group. The entity's sales pipeline was looking very healthy. Over 70% of the sales pipeline is international. Productivity improvement within Denel was a little worrying, which also spoke to the entity's level of gross profit. Denel still had some way to go to achieve market related gross profits. This was going to be an area of focus in the new financial year. The amount spent on R&D was quite high in terms of the percentage of revenue that was spent. R&D represented approximately 25% of Denel's revenue. This meant that Denel was still largely a development orientated company. It needed to produce far more of the units it was currently producing in order to achieve economies of scale. There were further efficiencies that Denel could achieve in the Denel Group but the biggest goal was to grow the entity's top line.

Denel was moving in a positive direction even though there were challenges that had to be overcome. Denel has managed to foster much better team spirit within the organisation. There was a better entrepreneurial culture and autonomy, and people were being set up to operate to their full potential across the group. Overall, there was better value driven leadership in the entity.

Denel continues to show good progress towards self-sustainability. The Group continued to improve on historic losses through value driven leadership, restructuring, improved access to sustainable markets, operational excellence, cost optimisation and strengthening governance and compliance.

Denel achieved a profit of R111m. Excluding the loss made by Aerostructures and excluding interest, the profit would have been R468m. The entity also generated a positive cash flow of R178m, an improvement of R522m from (-R344m) in 2010. The total cash flow amount would have been R402m if not for Aerostructures and interest expenses. The defence, security and certification clusters are now self-sustainable and generate an Earnings Before Interest and Tax (EBIT) EBIT of R130m and cash of R278m. Positive results were also achieved from the aerostructures turnaround plan. Although Denel’s balance sheet showed improvement at the end of the financial year, the entity’s debt and equity levels were still very concerning.

At the end of the last financial year, the Group made a net loss of R246m. At March 2011, Denel achieved a profit of R111m. 56% of the sales made by Denel are local, 19% of the sales are in the Middle East, 13% are in Europe, 6% in North America, 3% for Asia Specific, 2% within Africa, and 1% in South America.

Denel received a clean internal and external audit on their Annual report, which showed further strengthening of their governance structures. The entity complied with local and international codes, laws and regulations. Risk governance processes were in place and Denel was in the process of implementing the King III Code of Corporate Governance. However, Denel needed to strengthen its balance sheet due to the continued losses of Aerostructures and the concerning debt/equity ratio – Denel’s debt was at R1.85bn at March 2011. The debt trap requires a recapitalisation of R2bn. Solvency was also very low for an organisation of Denel’s size. Denel is experiencing low funding levels and there was pressure on bank facilities in terms of additional borrowings and the issue of bank guarantees.

Strategic drivers for sustainable growth were launched in 2011. They consisted of secure revenue growth, fostering productive relationships with the defence and security community, enhancing operational excellence and performance, optimising cash and profitability management, and being a respected South African company. Some of Denel’s major programmes include Project Hoefyster, A400M, A-Darter Missile, the Rooivalk Programme, the UN de-mining contracts and the periscope development and support contract.

Ms Patience Mashungwa, Group Executive: Human Resources and Transformation (Denel), stated that Denel’s group values included performance, integrity, innovation, caring and accountability. Employee well-being is central to Denel’s success. The entity organises road shows and interactive workshops dealing with wellness and personal finance. They also had programmes in support of HIV/AIDS awareness.

Employees’ skills development initiatives include courses and seminars, the engineering academy, employee study assistance, a group succession plan, and a leadership and management development programme. Youth Development programmes include bursaries, the Denel Youth Foundation Training Programme, SA Women in Engineering, the Schools Outreach Programme, learnerships, and artisan training. To address the challenge of skills shortages, Denel has focused its social investment resources and efforts to the development of mathematics and science. This is rooted firmly on working with learners to either encourage them to take mathematics and science at high school, or to provide bursaries to study engineering and science. The Denel Technical Academy (DTA) offers training courses to develop highly sought-after skills such as artisans. The Denel Youth Foundation Training Programme is a proactive response to the skills shortage in the industry and serves as a matric bridging facility. The programme costs Denel R5.2m annually. Learners are sourced from all nine provinces and provided with accommodation. Denel also offers a school outreach programme and learnerships to students. The entity offers bursaries to students to attract them into the industry. It is the primary tool for bringing young engineers and scientists into the group to counter the ageing workforce profile. Denel has built a close relationship with various engineering faculties at universities for technology programmes.

Denel believes in genuine transformation that is sustainable and adds value. There are transformation committees that are chaired by the business entity CEO or general manager. Denel has improved all aspects of the B-BBEE with an overall improvement score of 76%. This score makes Denel a 110% B-BBEE contributor and adds value to our suppliers. However, the entity still had challenges with their level of diversity (Employment Equity), skills development and preferential procurement.

In the future, Denel wanted to strengthen its balance sheet through the repayment of its debt and the successful implementation of new strategic drivers. The entity also wanted to continue with the implementation of its turnaround strategy to achieve the sustainability of Aerostructures. Denel has shown significant progress towards self-sustainability. However the financial position needs to be strengthened to drive growth. The entity’s equity position of R654m was likely to be eroded in about two years.

Discussion
Dr G Koornhof (ANC) thanked the entity for a precise presentation and the hard work that the executives put into the company. The Committee could see the concerted effort that was being made to turn the entity around. However, at the same time, there were disappointments and challenges. The Committee visited DSA – Denel’s problem area, and had a very fruitful visit. A report was tabled in Parliament on the oversight visit. One of the recommendations was that Denel had to provide the Committee with a progress report on the restructuring of the DSA on Friday, 28 October 2011. The Committee was looking forward to this report. Despite the profit made by Denel, the normalised position of the Group was still loss-making and the entity's financial position remains weak. The Auditor-General's (AG's) report said that Denel's situation was so desperate, specifically the funding requirements of the DSA, which meant it was a significant risk to the future of the Denel Group. If he understood correctly, Denel's “going concern” was only valid until 30 September 2012. This had to be addressed. He asked how Denel was going to get out of their desperate loss-making situation. The Presidential Review Commission was going to make a pronouncement on the situation next year, but the Committee wanted to know how Denel envisioned turning its situation around. The DSA was Denel's major Achilles heel. The Committee was aware of the technical capabilities within Denel, as well as the motivated people and the product line. However, there was no order book. The pricing with A400M was problematic. All the proposed solutions to the problem were not within Denel's mandate and were, therefore, out of the entity's control. The Annual Report showed that the funding requirement for DSA could not be sustained by Denel. He wondered why the entity could not just move forward. India had its own consolidated aerospace industry. He asked if there was room for a consolidated aerospace industry in South Africa where role players could work together. Was this a possibility? Denel said that the formal contract for the Rooivalk project has not been signed yet. In addition, the party responsible for any latent effects that could arise had not been clarified. This was a huge risk. He asked Denel to elaborate on the matter. Denel paid out SAAB to the value of R66m, but the Annual Report (pg 35) showed a claim from SAAB of R100m from Denel. What was the current situation? The Annual Report showed that Denel Dynamics secured a contract with a country in the Middle East in May for 1000 missiles. The value of the contract was for R1.2bn over a five-year period. He asked Denel to assure Members that this deal had gone through the National Conventional Arms Control Commission (NCACC) and was cleared by them. 

Mr Sadik replied that Denel had been through quite a journey. He did not think that they had come to the Committee at any stage over the past few years to say that they were going to be profitable. The important thing that Denel wanted to share with the Committee was whether they were heading in the right direction. Denel was quite a complex organisation and for the first time in years, it has generated a positive cash flow. If the Committee did not regard this as a success then he was very disappointed because Denel considered it to be a big achievement. They recognised that their profit was affected by the once-off pension fund gain but it had no impact on the entity's cash flow.

Mr Sadik said that it was important for Denel to get a sustainable solution for the DSA business in order to lift the Group out of its current situation. They were doing what they could but there were certain matters that were out of their control. But, from where Denel has come from over the past two years was good. The entity's loss has been reduced by over R200m from 2009 to 2011. It was important that Denel received its “recapitalisation” to settle its debt. It meant that there would be over R100m savings in their income statements. Denel's future state had to be resolved and this spoke to the strategic capabilities required by the country and how it would be funded by DDMV. The three major issues for Denel were the DSA, the interest rates and Denel “future state”, and the entity's export market because Denel could not rely on the local market for all of its revenue.

Mr Fikile Mhlontlo, Group Financial Director: Denel, added that the interest charged on Denel's debt was one of the reasons Denel had a normalised loss position even though there was an overall profit.

Mr Sadik agreed that the DSA was Denel's Achilles heel. The problems were out of Denel's control but significant progress had been made around the aero-structures business. Airbus has indicated their willingness to revise the contracts that Denel currently has with them, and many positive discussions were had between the two entities. He hoped to conclude the discussions by the end of November 2011. Denel was also receiving very strong support by broader government, specifically from the Public Enterprises Ministry.

He stated that the A400M was a global programme. It exposed Denel's engineers to world-class business processes. He agreed that the order pipeline was an issue, and that it was out of Denel's control. But, very good discussions were being held concerning the matter and Denel was in the process of building on the IBSA relationship. Denel has also been having discussions with other credible aircraft manufacturers. Denel has put in bids in the market to the value of approximately R2bn. Denel has spoke to many other countries with aerostructures industries. They all spoke to what they did to boost their aero-structures business and what this has done to increase the industrialised capabilities of those countries. But, this was not an easy journey for any of these countries. It took about 10-20 years for the economy to reap the benefits. It was for this reason that one would not find a private sector player going into these sorts of environments. But, as a state owned entity, Denel was there to serve a greater need, to create skills, and to create a strong supply chain to global standards. It was possible for South Africa to have an aerostructures industry, but there had to be alignment with all the key ministries. The government had to recognise that it was going to be a difficult journey, but they had to take it on to improve the country's industrial capabilities.

Mr Sadik said that in terms of Rooivalk, the baseline was revised. There was a Denel end-state project that spoke about a revised baseline and this memorandum was tabled to Cabinet. Denel was still in discussion with the DDMV to get the CVO signed. The entity had a contract on Rooiveld but they needed to get a contract variation order for some of the revised technical baselines. There was an agreement between the airforce, Armscor and the DDMV, but it was still going through the formal processes. There were certain risks involved but discussions were being held to find ways to mitigate the risk. At the moment, the Rooivalk has a product timeline support. This has not been finalised yet and matter remains unresolved.

Mr Sadik answered that they were not 1000 missiles. They were bombs that were sold to an important credible player in the Middle East. He assured the Committee that Denel always made sure that any sale that was made complied with the NCACC regulations. Significant steps were taken to ensure that Denel complied with all local and international regulations. He could not reveal the name of the country but said that it had never had a United Nations arms embargo on it and it was a credible nation. The Middle East was an important market for South Africa. Before every sale, Denel made sure that they had proper approval for it.

He explained that the R100m loan being claimed by SAAB was not owned by Denel. It was owned by the stand-alone company called Denel SAAB Aerostructures. Despite the fact that Denel now owned the company 100% did not change the fact that it was still a Pty (Ltd) company that had its own books and liabilities. So, the R100m was not Denel's liability.

Ms G Borman (ANC) thanked Denel for all their hard work over the past year. She referred to the independent auditors report (page 123 of the Annual Report), which spoke to emphasis of matter. It said that despite the R111m profit that was made, there were conditions and other matters that indicated the existence of material uncertainties that would affect Denel's ability to continue as a going concern. She asked Denel to elaborate on what the uncertainties were. She noted that Denel's employment equity was “out of sync”. She asked if the entity's youth programme, which included training in engineering, was going to fill the gap in their employment profile. Was the training of Denel employees mandatory or voluntary? She noted that Turbomeca Africa did not seem to have a confirmed order book. She asked Denel to elaborate on this. It seemed that huge amounts of remuneration were being paid to executives and management. Denel spoke about fixed pay and variable pay. Was the variable pay in addition to what was already included in the fixed pay? In terms of non-executive directors’ remuneration, how was this salary worked out? Were they paid on the basis of what committees they attended? She also wanted more clarity on what the committees were.

Ms Mashungwa confirmed that the youth programme fed into the workforce profile. Where training is required as part of the job, it was mandatory. But, when appraisals are done and it is found that certain employees lack personal development requirements, then it is voluntary. Employees are urged to do the training, but it is not mandatory.

Mr Sadik informed the Committee that the RDM confirmed order book sits at approximately R1.5bn. It was an oversight on Denel's part if the information was not captured correctly, but it was at a record level. Denel has not had an order book on its munitions business that was at R1.5bn.

Mr Kunene explained that remuneration package consisted of two portions- a fixed portion and a variable portion. The variable portion was at risk in that it was only paid out when targets were met. Denel would submit, in writing, the structure of the salary remuneration. The variable portion is based on financial performance, commitment to transformation and stakeholder management. The evaluation is undertaken by the remuneration committee, who determines if targets are met. The DPE gives the board guidelines on how the remuneration should be structured.

Mr Mhlontlo addressed the question on the remuneration of non-executive directors. He said that it was done according to DPE guidelines and members are compensated based on the attendance of meetings.

Mr A Mokoena (ANC) said he understood that Mr Sadik was leaving Denel. He asked why he had decided to leave. He was sad that Mr Sadik was leading as he was an eloquent and capable leader; however, he was also saddened by his non-accountability to the Committee. When a strategic workshop was held at Shelley Point for all the CEOs and chairpersons, Mr Sadik showed his face for 15 minutes and left. The purpose of the workshop was to help “heal one another”. Perhaps if Mr Sadik had been more accountable, there would be no need for him to flee. One Denel's 13 entities had been listed on the stock exchange some time ago. He asked what happened with this subsidiary. He wanted to know how many patents there were in Denel and who the custodians of the patents were. What was the net asset value of Denel?

Mr Kunene explained that before Mr Sadik was appointed Group Chief Executive three years ago, he was the Chief Financial Officer for Denel. Last year around June or July he indicated that he would not be available to serve another term should he be asked to do so. He voluntarily decided that he did not want to extend his contract. There was no dispute to talk about.

Mr Sadik replied that he had apologised for not attending the Committee's workshop. He had cleared it with the Chairperson beforehand. He had to attend a board meeting of one of Denel's entities. He apologised once again for his absence on the day, as he did not mean any disrespect by it. The Committee was a very important shareholder to Denel.

Mr Sadik stated that none of Denel's 13 divisions were listed on the stock exchange.

Mr Mhlontlo added that there was a contemplation of listing Denel some years ago, but this was never done.

Mr Sadik said that there were always problems when one wanted to register patents in the defence and security sectors. He did not know the exact number of patents held by Denel. He could follow this up with a more detailed response at a later stage. Normally, most of the patents produced by Denel were with the DDMV because they funded the development cost. 

Mr Mhlontlo answered that Denel's net asset value was R654m, which was low for a company of Denel's size.

Mr Sadik added that the net asset value amount did not include the value of Denel's Intellectual Property (IP). Over a billion Rand had been spent on IP each year for the past three years, but this was not reflected in the balance sheet. If this was taken into account then the net asset value would be quite substantial.

Mr K Dikobo (AZAPO) congratulated Denel for making a profit. The Committee was aware of the journey that the entity had made to get to that point. He noticed a problem with the structure of the Annual Report. When an individual did not have time to look at the entire report, they looked at the targets, the achievements, the variances and how they explained the variances. This was not included in the report. Neither was the information for whether Denel's performance was in line with their budget. Denel spoke to the amount of people being trained, but it did not tell the Committee what the entity's initial target was. The youth development interventions were a good idea, but wondered how Denel identified the youth and how effective the outreach programme was. He asked where the teachers that were being trained came from.  He also wanted to know how sure Denel were that the countries they were selling defence technology to were not rogue states or organisations. The Committee needed assurance about this.

Mr Mhlontlo answered that presentation highlighted some of the key issues contained in the Annual Report so the Committee could engage on those issues. Denel welcomed any input on the presentation. 

Mr Sadik explained that Denel always ensure that it received proper approval before a sale. For this, they needed to get approval from the NCACC. Before the sale, Denel had to get a marketing permit. Once the marketing permit was received, Denel also had to get a permit to transport the goods from South Africa to the receiving country. Denel has never sold its products to a rogue state. The Committee could be proud of all the sales made by Denel as they complied with local and international regulations. South African regulations were very clear – if there was a conflict in the country, Denel would not be able to sell their goods to the country.

Ms Mashungwa replied that Denel tried to “hop” on to some of the programmes that government already had in place in terms of youth. They did not establish new programmes, but looked at what government has already established such as the Dinaledi programme. For the bursary programme and youth foundation programme, Denel made sure that it went out to universities. There was a website that learners could look at as well. Denel recently joined the South African Graduate Recruiters Association that gave them access to learners that wanted to access funding. Denel believed that its programmes were very effective. If not for the programmes, Denel would not be able to replace any of the skills that are lost during the year.

Mr C Gololo (ANC) noted that the DSA was still performing badly after so many years. He understood that a turnaround strategy was in place, but wondered if Denel had considered re-establishing some of their non-core businesses again. He noted that Africa constituted 2% of Denel's sales. He asked which countries Denel sold its products to. The Skills Development and Employee Wellness programme was an excellent idea. What criteria did Denel employ to select the trainees and bursars? Did they do road shows around the country to attract learners?

Mr Sadik replied that Denel believed it was making good practice with the DSA, but based on international best practice, it was going to be a long journey.

He said that when Denel embarked on its turnaround strategy, it was a “back of a cigarette box calculation” to say that Denel needed R5.2bn. Denel received an actual amount of R3.5bn, so there was an outstanding amount of R1.7bn. Denel has been engaging with government on this and it has shown that the “back of a cigarette box calculation” was actually correct. Denel's debt amounted to R1.8bn. Had they had the extra R1.7bn, they would not have incurred any interest expense on the debt.

Mr Sadik explained that because their arms sales were sensitive, they could not disclose the names of the countries that they sold to. Denel did a lot of de-mining work in Africa, and they helped to maintain military aircrafts. He assured Members again that all the sales required NCACC approval.

Mr M Sonto (ANC) reminded Denel that having an unqualified report did not mean that there were no mishaps or problems, especially with Denel since it had matters of emphasis. He liked the idea of a Sustainability Vision Strategy and Commitment, but was quickly baffled when he read that the report had not been independently assured. Certain sections that were reported contained limitations as a consequence of the fact that not all the data measurement techniques were in place, and therefore, could not provide the full impact of Denel's sustainability activities. As deflated as the Member was, he was happy that the Group had made a profit even though they were registering huge losses in other disciplines. He commended them on this. Denel said that in the process of attracting skills there were also retrenchments. He was worried about the skills that were lost. One had to look at Denel's retention strategy for critical and requisite skills. It was also important to note that Denel was not performing well in terms of employment equity transformation in critical areas where skills were scarce such as engineers and scientists.

Mr Mhlontlo explained that the emphasis of matter stemmed mainly from the fact that Denel’s debt levels were very high and the overall net asset value position was very low for a company of Denel's size.

He said that within the King III, the sustainability report was an area of emphasis. Hence, Denel was producing a sustainability report. It provided that the board could evaluate and decide on assurance. The sustainability report has not yet been assured, but it will be shortly. The gathering of relevant data was also happening over time.

Ms Mashungwa replied that the divisions within the Denel Group were quite different so the skills affected by the retrenchments were not necessarily matched to the skills that other divisions might require. Denel always made sure that retrenchments were a last resort. So by the time they let go of employees, it was understood that there was nothing else that could be done. Denel also had a social plan in place to ensure that those affected by the retrenchments are taken care of in terms of medical funding and so on.

Mr P van Dalen (DA) noted that Denel's turnaround strategy had taken effect and the entity's loss had been minimised. When the Committee visited Denel, they were told about the R1.8bn that the Department of Public Enterprises (DPE) was going to give to Denel. To date, this has not happened. He asked Denel to elaborate on this. How has it affected Denel's business? When the Committee visited Denel, they were also told that SAAB had exercised their right to exit the contract they had with Denel. Members asked how much money it had cost Denel for SAAB to exit and they were told that it did not cost Denel anything – SAAB simply cut their losses and left. But, he heard that it had cost Denel R176m, which was a lot of money. He asked Denel to elaborate on the matter. Denel made many statements about how they were training people and helping them find positions in the company. However, he came across something on the internet. Someone complained, saying that s/he had completed a 10-month course at Denel Aviation as an aircraft mechanic and was looking for a place to complete her/his internship. This meant that Denel was training people but they had to look elsewhere for work. He asked why Denel was not keeping the people that they trained. The Minister, in a statement, asked Denel to do a review of their business case study. Has this happened? The Minister had put emphasis on including “civilian products” in their product offerings. He asked if this was being done.

Mr Sadik answered that he could not recall telling the Committee that SAAB's exit would not cost Denel anything. If Denel said this then they were wrong, and they were negligent. Denel always said that they were bound by an agreement that was signed by SAAB.

Mr Mhlontlo added that Denel clarified that SAAB was allowed to exit according to the contract. Denel had also clarified previously that SAAB's capital contributions and loans would have to be paid to them. The capital portion has been settled.

Mr Sadik agreed that the Minister had asked Denel to do a review of their business case study to drive into more civilian applications. Denel took this up with their board and would be in discussions with the Ministry as well very soon. A first draft has been completed and there were some merits as well as a few challenges. Denel wanted to share this with their shareholder Ministry first and then the Committee.

Ms Mashungwa addressed the question on the apprentice that was in search of work elsewhere. She said there could be a mix with regards to the two programmes. The bursary programme fed into the engineers and these bursars are taken up at the point of exit. The Member was referring to an apprentice that was looking for on the job training with a potential employer. This was part of Denel's plan for the Denel Technical Academy, which was an artisan development school. If they received enough funding, they could make sure that the apprentices are taken up to the point of qualifying as artisans.

Dr S van Dyk (ANC) noted that Denel had said in its presentation that the current bank facilities of R5bn had to be increased to R10bn. He asked if Denel would receive this money without a guarantee or if someone would have to step in as a guarantor. A lot was said about the HR side of the company. The Committee would prefer hearing more about Denel's core business and production. The presentation spent a lot of time focusing on issues that were not part of the entity's core business. He asked if Denel could afford giving away 55 bursaries as well as all the training. Denel spoke to the value it added to the country. They said they ensured that the country had a safe, good military. It seemed that Denel delivered a lot of arms and ammunition to the military even though South Africa was not in any war position. The impression that they gave was that if they did not exist, there would be no arms for the military. He did not see how the army could have consumed as much arms as Denel was trying to impress upon the Committee. He asked what Denel delivered to the SANDF.  If the Committee had to make a recommendation to the Presidential National Commission to close down Denel, what would their counter argument be?

Mr Mhlontlo answered that the current bank facilities were at approximately R5bn, but in light of new business, there was a requirement to increase those facilities. Denel was saying that it was experiencing challenges because often the banks looked at the state of the balance sheet in order to grant entities more facilities.

Mr Sadik replied that at this point, Denel was not meeting all of the needs of the army. However, the entity still played a very important role in the economy. Denel looked to the Committee for support and not to talk to closing the company down, but to talk to how to make Denel a respected company in the country. The Committee should not only be looking at Denel's output; they also had to look at its journey.

Ms Mashungwa explained that bursaries were core to Denel's business, which was to focus on technical skills. Without these technical skills, Denel did not have a business. Bursaries were a proven form of growing skills in a technical environment like the one Denel was in.

Chairperson Koornhof stated that if Denel had any problems with the structure or format of their Annual Report, then they had to take the matter up with the National Treasury or the shareholder. This had to be discussed. He noted that Denel has been in a court battle with the government of India for the past six years. He asked what the status of the court case was. He was concerned as it seemed that India was potentially a very big client for Denel.

Mr Sadik replied that India was very important for Denel, especially the IBSA relationship. The matter was still going through a legal process so they could not share anything with the Committee. But, Denel would share the details with the Committee as soon as possible.

Ms C September (ANC) addressed the matter of skills development. Moving forward, the Committee wanted to see a change in the approach to skills development. The broader problem was the way in which it assisted the country in achieving the outcome that it wants. If the training programmes did not speak to the country's requirements then those that were trained will not be absorbed into the country. Denel had to look at forming a partnership with the Committee. All the Members in the Committee came from their own constituencies and could reach their own people. Most communities have never heard of Denel. Something drastic had to be done to address the high unemployment rate. She suggested that the Committee ask Denel to make quarterly report presentations to the Committee, as Members needed to know what they were putting their profits into.

Ms Mashungwa replied that the skills development approach was something the Committee could work on.

Mr M Nhanha (COPE) noted that Denel seemed to be taking the country's South-South trade initiatives very seriously, as well as inter-Africa trade initiatives. The matter of demographics within Denel was a sensitive matter for the Committee. For the past two years the Committee has told Denel that their demographics did not reflect the population of the country. He requested that the new chairperson take it upon himself to resolve the matter.

Mr M Sonto (M) said he hoped that the retrenchments were in line with the ageing staff complement. He said that there were “lions with rough teeth there that have to be replaced by young cadets”. He was happy with the way Denel structured its HR management environment. There were transformation committees that were looking at a variety of issues regarding the staff, yet the entity listed low morale as one of the risk factors that Denel had. He asked how they deal with low morale of staff through these transformation committees. His understanding of the Rooivalk situation was that the helicopter was not selling. He asked who Denel's market was for Rooivalk because it was taken abroad and no one would buy it.

Ms Mashungwa answered that Denel consulted with recognised unions when they had to resort to retrenchments, as it helped them to consider the workforce profile.

She said that the low morale of workers could be attributed to the aerostructures retrenchments that happened last year.

Mr Sadik added that, overall, he did not believe that Denel employees suffered from low morale. However, in general, low morale was always considered a risk as it was always something that entities had to prepare for.

Mr Sadik explained that the Rooivalk journey was just as important as the end product. Just because Denel was not successful in selling Rooivalk internationally did not mean it was not a great product. In fact, it was a world-class product. The international market was quite competitive and Rooivalk was comparative to Europe's Tiger and the US Apache. It may not have been successful internationally but it was Very successful in terms of the jobs it created and the sustainable capabilities that it had.

Chairperson Koornhof thanked Denel for its presentation. He urged Denel to take note of the concerns raised by Members, as the problems would not go away. He wished them well for the year ahead and told Mr Kunene that the Committee looked forward to having a long working relationship with him. He bid farewell to Mr Sadik, thanking him for the time, leadership and input he made into Denel. The Committee noted his efforts and appreciated it. He also thanked him for having such a good working relationship with the Committee – he would always be remembered for this. The Committee wished him well for the future. He noted that Denel had thousands of employees. He asked the Denel delegation to thank all the employees for their hard work on the Committee's behalf. He noted Ms September's suggestion that the Committee needed more interaction with Denel. The Committee would look at how to build a better Denel.

BRRR Discussion
Chairperson Koornhof informed the Committee that he received a message that the National Treasury only gave the Second Quarter Expenditure Report that went up until 30 September 2011 to the Committee two hours ago. The researcher was in the process of updating the BRRR, so it was not ready to be discussed and adopted. The final report would have to be submitted and adopted next week.

The Committee agreed.

The meeting was adjourned.